Entries from November 2013 ↓

Worth only ten bucks earlier this year, it’s just touched a thousand. That makes a Bitcoin the hottest financial asset on the planet right now.

The digital currency has lured the tuna-and-toiletpaper set that grew disillusioned and tired with gold. Anarchists and iconoclasts love them because Bitcoins owe allegiance to no nation or central bank. They are perfect for those awaiting, or impatient, for the collapse of America and capitalism. They’re ideal for druggies, terrorists, tax evaders and money launderers. And, of course, those speculating in them have made out like bandits.

Bitcoin is a currency used to buy stuff from retailers, drug dealers, hookers or assassins who accept it, plus it operates as a payment system like PayPal. It was born out of the 2008 financial crisis and runs on an elaborate global network of host computers without a central control agency (like the Bank of Canada, which dictates the supply of dollars). Many think it will evolve into a world payment system and an alternative currency free from the surly bonds of any country’s tax system.

In short, could Bitcoin be perfect?

Paul ain’t so sure:

“I’m one of those people that straddles the Gen X/Y border. As such, I have a bunch of moron friends who think that Bitcoins are worth an investment and that they are the way of the future,” he writes me. “Funny enough, some of these guys are the same who said gold and silver were worth holding. Can you please help me cut them down to size? Ultimately I don’t carry the same clout you do, nor can I write it with the same eloquence.”

Actually Bitcoins have traction. There are 12 million in circulation, and while you can create or ‘mine’ Bitcoins if you have enough computing horsepower, they’re designed to inflate less quickly than technology advances. So, like precious metals, there’s a finite, rationed supply. Bitcoins are virtual money when they act as a borderless, frictionless, instant, global medium of exchange.

In many ways, it’s digital gold. If that sounds even more quixotic than the real stuff, you get it. But while Bitcoin commerce is immature and seems more like romanticized piracy than Wal-Mart, it just took a big jump towards the mainstream. That happened two weeks ago when a US Congressional panel held hearings into the utility of digital currencies, and even heard some kind words from Fed boss Ben Bernanke.

“While these types of innovations may pose risks related to law enforcement and supervisory matters,” he said, “there are also areas in which they may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system”. Wow. Sounds legit, almost.

No conclusion was reached in Washington, but the FBI recently shut down the most prominent Bitcoin commerce site, Silk Road, for selling illegal drugs, arrested its founder and seized 30,000 Bitcoins. In other words, Big Government and Big Law aren’t about to let a cryptocurrency circumvent all those regulations designed to keep us ruly.

Ironically, all this has massively inflated the value of a Bitcoin. As I mentioned, it just hit $1,000 for the first time, which is cool if you bought in at $186 a month ago. It could go higher, the Internet being what it is – full of weird people who trust anonymous, peer-to-peer, unfiltered, unregulated transactions more than they do the money they pay rent with. But it could tank at any moment, too. In fact, it has in the past. Spectacularly.

So it’s volatility which turns Bitcoins from money into a speculative commodity. Anything that bounces around this dramatically is no storehouse of value, which has been a traditional role for gold. As for being a viable currency, forget it. How could you possibly conduct a serious retail business selling heroin or AK47s when your medium of exchange was so wonky? If you sold stuff for a few Bitcoins and the price collapsed a week later, you’d be whacked. If the buyer paid in digital coins which then doubled in value, he’d be screaming. Without a central bank trying to control the money supply, inflation, deflation and borrowing costs, chaos wins. Bitcoin loses.

That means only convert if you’re a specker who understands the value could be $10,000 or zero next year. Also realize if Bitcoins actually do form a bigger part of ecommerce, they’ll end up being regulated and controlled by the same authorities that print pictures on paper and let you buy lunch with them.

Having said that, digital money is a certainty. We’re almost there already. When was the last time you actually went to a bank or a machine to get cash? From earning to spending money, most people never touch actual bills. Now with smart phones storing money, credit cards you tap and ubiquitous online shopping, the entire concept of currency has changed. Bitcoin’s just a radical version of that, stripped of control, stripped of discipline.

Hard to fathom, but not everyone who comes here loves me. Less than 1% of daily visitors leave a comment, and nine out of ten are worthy of publishing. But some people are plain nuts. Especially when they want to toss the Chinese.

Because of people like you I am starting to hate this country u giant bearded DELETED.

You would rather let your tiny marbles get entangled in yer beard and set on fire then admit your favorite new chinese boss with stolen money screwing up buying up our RE from under cash poor Canadians…….DELETED

That’s a sample. Not the worst. But the volume of posts from xenophobes and whackjobs is growing. I archive the comments so the RCMP has something to do after a drone, or a Prius, takes me out. For 2011 the single-spaced Word document ran to 137 pages. Last year it was 208 pages. So far this year (and it’s still November), it’s 226.

What irritates people the most about my magnetic personality and laser-like thoughts? Lately it’s been my refusal to believe anybody other than the deluded masses who live in this country is actually responsible for houses people can’t afford. Foreigners influence every market in varying ways, but there are no stats to prove Canada’s more unique than the US, or Vancouver more impacted by offshore money than Seattle or San Francisco.

In fact, the vast preponderance of sales in Toronto, Calgary, Montreal and Vancouver are made by locals to locals. When they stop buying houses with vast amounts of borrowed money, whatever the price, or quit believing past gains are a guarantee of future ones, values will decline. It has nothing to do with how many Asian people you see on the way to the beer store. Mostly, as I started delineating days ago, it’s about the economy and jobs.

If you feel like worrying, then worry about this.

Commodity prices are weak, and likely to stay that way. Bad news for a nation where resource sales are so key. Fracking and other techniques have increased US oil production to eight million barrels a day and started that country on the fast track to energy independence. Meanwhile last week’s nuke deal with Iran and its sweet little foreign minister have folks expecting a new flood of oil coming from there soon. So, crude at 93 bucks a barrel sure looks like it’ll be worth less. Hope you didn’t just win a bidding war for an OSB McMansion in Calgary.

Canada’s job creation machine is running dry. In fact, in the past five years I’ve never known as many 50-something, middle-management guys who have been sent home. Most will never work again.

Our manufacturing sector is shrinking monthly. We lost 30% of our fabricated exports during the financial crisis, and they haven’t come back. More people are building condos than working on factory floors – and we all know that will soon end.

In 2008 Canada has a big current account surplus – we sold more stuff to the world than we imported, building up national equity. Today it’s a deficit four times larger than the profit used to be, sitting at 3% of the GDP. Without big gains in resource sales – which will only follow a surge in global growth – no reason for improvement. And that, say economists, means the dollar is at risk.

BMO, Nesbitt, Goldman, Scotia, National Bank – they’re all warning in various degrees about a toppling of the loonie. Bay Street says 93 cents is probable. Goldman is calling for 88 cents. A weak economy, they argue, will certainly be reflected in a weak currency.

Despite four years of dirt-cheap loans, a real estate gasbag and consumer debt overshoot, there’s basically no inflation. Prices rose at an annualized rate of just 0.7% last month, far below the Bank of Canada’s target range. No inflation means no real economic growth, no upward pressure on prices and no real wage gains.

This is nightmare stuff for policy-makers: they made money cheap so people would consume goods, spur demand and create jobs. Instead folks gorged on loans to buy houses which soared in value, creating more even debt and a nation so mortgaged that people sit at home with no savings, investments or disposable income. Then, employees at Sears and Best Buy get whacked.

Two years ago I suggested you buy America and sell Canada. It was evident we were on the wrong path, while the US entered recovery. Those who followed this advice have seen their Phoenix houses jump 40% in value and their US equity ETFs flower 25% in eleven months. As things enter a worse phase here, it’s hard to imagine a more at-risk asset class than residential real estate.

Well, it wasn’t the Chinese who forced us to borrow so much. Or made tacky Vancouver bungalows average $1.1 million. It wasn’t immigrants who choked off oil demand. People from away were not responsible for creating a country of condo-builders where exporters once stood. They didn’t turn us into speculators, when we used to be savers. The Chinese (or Russians, or Iranians) are just surrogates for our own malevolent wants.

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The views expressed are those of the author, Garth Turner, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.